Germany and its Greek dilemma
The general mood at 1, Willy-Brandt-Straße in Berlin was tense lately. The German chancellery’s headquarters, one of the world’s largest executive buildings – 8 times the size of the White House – is filled with an army of thousands of civil servants, mainly preoccupied with pending domestic issues, from unemployment and economic growth to fiscal fraud enforcement.
However, the question which worries Angela Merkel, the German Chancellor, and her close advisers more is the financial chaos in Greece and its consequences for the Eurozone.
Considering the solidity of its economic fundamentals, its excellent score with credit rating agencies, and a discipline in the management of its federal budget akin to the precepts of the best Wehrmacht strategists, Germany was able to resist the deleterious effects of the crisis better than other European counterparts.
Berlin is not only Europe’s superpower by many standards; it remains the continent’s fundamental economic engine. This position poses Germany a dilemma because its interdependence with other countries within the Union (export-based economy) and the absence of tariffs (Schengen Accords) force it to lend a hand to its neighbors.
In short, Germany must engineer a Marshall plan to enliven the weakest links in the federation’s economic chain if it does not want to be a collateral victim in the long term.
Angela Merkel and federal Finance Minister Wolfgang Schäuble remained for a long time unwilling to help weakened economies within the Union because they suspected that some nations use Europe as a conduit to vent their domestic troubles.
The lack of trust explains Berlin’s reticence to use the European Central Bank and the Bundesbank as principal bailout sources, preferring the IMF and other transnational channels so that financial risks can be spread over a larger spectrum of investors and countries.
German analysts and financial markets emphasize that Greece has not been a model of economic management of late. Far from being a geostrategic dwarf like Iceland, Greece is a solid economy (primarily based on tourism and the maritime sector) ranked 26th on the IMF list (Country GDP in 2009).
But the surreal fact remains that the country, currently under the premiership of American-born Geórgios Papandréou, was found guilty of statistical fraud when it applied for EU membership.
Greek leaders must tackle seriously current public deficit and debt payment problems, and upcoming fiscal tightening measures will only increase social unrest.
Other countries within the Old Continent, currently grouped under the less flattering P.I.G.S. acronym, have a similar prognosis. They are Portugal, Italy, (Greece), and Spain and have economies hard hit by the real-estate crisis, a climbing unemployment rate, a fall in industrial productivity and scores of outsourcing decisions by private firms.
European leaders will undoubtedly react to avoid a domino effect potentially deleterious for the rest of Europe. Many options are available to them, including a direct ECB assistance to Greece, a partial repurchase of Greek debt by the central bank, subsidies from transnational institutions like the IMF, and an increase in protectionist measures to stop the socio-economic crisis (e.g.: shoe war with China).